How did GM pay off its bailout loans?

posted at 10:12 am on April 23, 2010 by Ed Morrissey

The backers of the bailouts to General Motors cried with triumph this week when the automaker announced that they had repaid their bailout loans ahead of schedule. That amounted to proof of the wisdom of government intervention, the argument went, and wondered aloud why bailout critics didn’t acknowledge their errors. Perhaps it’s because the government essentially got paid off with even more government money:

During an April 20 hearing on Capital Hill, Sen. Tom Carper, (D-Del.) asked some pointed questions of Neil Barofsky, the “special watch dog” on the Wall Street Bailout, aka, TARP.

“It’s good news in that they’re reducing their debt,” Barofsky said of the accelerated GM payments, “but they’re doing it by taking other available TARP money.”…

“It sounds like it’s kind of like taking money out of one pocket and putting in the other,” said Carper, who got a nod of agreement from Barofsky.

“The way that payment is going to be made is by drawing down on an equity facility of other TARP money.”

This prompted a stern letter from Senator Charles Grassley (R-IA), who backed the bailouts, to Treasury Secretary Tim Geithner about the shell game being played by the Obama administration and GM (via Yid with Lid, emphases mine):

General Motors (GM) yesterday announced that it repaid its TARP loans. I am concerned, however, that this announcement is not what it seems. In fact, it appears to be nothing more than an elaborate TARP money shuffle.

On Tuesday of this week, Mr. Neil Barofsky, the Special Inspector General for TARP, testified before the Senate Finance Committee. During his testimony Mr. Barofsky addressed GM’s recent debt repayment activity, and stated that the funds GM is using to repay its TARP debt are not coming from GM earnings.

Instead, GM seems to be using TARP funds from an escrow account at Treasury to make the debt repayments. The most recent quarterly report from the Office of the Special Inspector General for TARP says “The source of funds for these quarterly [debt] payments will be other TARP funds currently held in an escrow account.” See, Office of the Special Inspector General for TARP, Quarterly Report to Congress dated April 20, 2010, page 115.

Furthermore, Exhibit 99.1 of the Form 8K filed by GM with the SEC on November 16, 2009, seems to confirm that the source of funds for GM’s debt repayments was a multi-billion dollar escrow account at Treasury—not from earnings. In the 8K filing GM acknowledged:

Of the $42.6 billion in cash and marketable securities available to GM as of September, 30, 2009, $17.4 billion came from an escrow account with Treasury,

$6.7 billion of the escrow account available to GM was allocable to the repayment of loans to Treasury,

$5.6 billion in cash would remain in the Treasury escrow account following the repayment by GM of their loans, and

Upon repaying Treasury, any balance of escrow funds would be released to GM.

Therefore, it is unclear how GM and the Administration could have accurately announced yesterday that GM repaid its TARP loans in any meaningful way. In reality, it looks like GM merely used one source of TARP funds to repay another. The taxpayers are still on the hook, and whether TARP funds are ultimately recovered depends entirely on the government’s ability to sell GM stock in the future. Treasury has merely exchanged a legal right to repayment for an uncertain hope of sharing in the future growth of GM. A debt-for-equity swap is not a repayment.

I am also troubled by the timing of this latest maneuver. According to Mr. Barofsky, Treasury had supervisory authority over GM’s use of these TARP escrow funds. Since GM’s exit from bankruptcy court, Treasury had approved the use of the escrow funds for costs such as GM’s obligations to its parts supplier Delphi. See, Office of the Special Inspector General for TARP, Additional Insight on Use of Troubled Asset Relief Program Fund (SIGTARP-10-004), dated December 10, 2009, at page 6. According to the GM 8K, GM had planned to use the TARP funds in escrow to pay back the TARP loans on a quarterly basis beginning in the fourth quarter of 2009. But following the April 20, 2010, hearing of the Senate Finance Committee, where Treasury’s decision to exempt GM from the bank TARP excise tax was questioned and GM’s refusal to testify was noted, it is odd that GM suddenly drew down on the TARP escrow and accelerated the repayment of the remaining balance of GM’s outstanding TARP loans.

The bottom line seems to be that the TARP loans were “repaid” with other TARP funds in a Treasury escrow account. The TARP loans were not repaid from money GM is earning selling cars, as GM and the Administration have claimed in their speeches, press releases and television commercials. When these criticisms were put to GM’s Vice Chairman Stephen Girsky in a television interview yesterday, he admitted that the criticisms were valid:

Question: Are you just paying the government back with government money?

Mr. Girsky: Well listen, that is in effect true, but a year ago nobody thought we’d be able to pay this back.

Mr. Girsky then said that GM originally planned to pay the loan over the next five years. So the question is why—other than a desire to justify excluding GM from the administration’s TARP tax proposal—would Treasury and GM reduce GM’s TARP debt with TARP equity and then mischaracterize it as a repayment from earnings? Accordingly, please explain:

1) Your department’s justification for allowing GM to use funds from the TARP escrow account to repay TARP loans,

2) The amount of funds remaining in the TARP escrow account at Treasury that may be released to GM, and

3) The date that you anticipate that the remaining funds in escrow will be released to GM.

Thank you in advance for your cooperation. Please provide the requested information by April 30, 2010. …

Sincerely,
Charles E. Grassley
Ranking Member

In other words, this is just a shell game. As Jim Vicevich points out, it’s akin to paying off your Visa credit card with your Mastercard — and then bragging about your financial condition. Taxpayers are still on the hook for GM. Nothing at all has changed.

Instead, we have another good reason for government to refrain from bailing out private companies. It makes them act like government when it comes to transparency about their finances. This claim really does prove that GM now stands for Government Motors.

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My nephew was recently bragging about his purchase of Ford stock when it hit rock bottom last year and has tripled since.

Since his Mother (my sister) is a loyal democrat, I pointed out to him that he also owns stock in GM, via Obama, of which not only will he never profit, but will likely be taxed on his Ford stock profit to pay for GM’s bankruptcy. In addition, I explained, imagine how well your Ford stock would have done if GM would have been allowed to liquidate and fail and Ford would have picked up the additional market share.

Sometimes seeing the pain in a democrats eyes when they are slowly sobering up and seeing facts is extremely gratifying.

I am trying to recall my securities law on this topic; perhaps someone who has more recent exposure can provide better information, but I recall that when a CEO tries to manipulate public perception of the value of a company by false assertions or ommissions of fact, it constitutes a 10(b)(6) violation. If anyone bought GM stock based on these representations, and the stock loses value, someone will be held liable. As far as criminal liabilities go, can you say “Enron?” There does not seem to be an appreciable difference in management conduct. In my opinion.

GM is not too big to fail… we know that because it is failing and nothing will keep it propped up. That and other companies we are ‘bailing out’ will be the ruination of the Nation as it is trying to forestall the inevitable. King Canute was not happy going to the seashore to show his advisors that he couldn’t stop the tide. King Obama is dancing amongst the waves…and yet the tide still keeps right on coming in.

I am trying to recall my securities law on this topic; perhaps someone who has more recent exposure can provide better information, but I recall that when a CEO tries to manipulate public perception of the value of a company by false assertions or ommissions of fact, it constitutes a 10(b)(6) violation. If anyone bought GM stock based on these representations, and the stock loses value, someone will be held liable. As far as criminal liabilities go, can you say “Enron?” There does not seem to be an appreciable difference in management conduct. In my opinion.

ObjectionSustained on April 23, 2010 at 11:30 AM

I agree. However, he’s not recommending buying the stock. He’s recommending the product.

Really if the government wants to get this ‘off the books’ just hand each and every US Citizen on share of GM from the amount the government has put in it.

A voting share.

The American People can do a damn-sight better job figuring out what to do with GM than the President, Fed, SEC, Treasury, Congress… all of them combined can. Do the same with all other companies the government invested in… you did it for the people? Then give me my share because you did it in my name and stop trying to be the intermediary between the people and their economy.

“It sounds like it’s kind of like taking money out of one pocket and putting in the other,” said Carper
The problem is that there was no money in either pocket to begin with. It would be more analgous to filling a hole with more hole.

I agree. However, he’s not recommending buying the stock. He’s recommending the product.

That is how he can toot the horn and get by with it.

AnninCA on April 23, 2010 at 11:59 AM

I haven’t practiced securities law for 20 years, therefore I am not a very reliable source on the subject, but any attempt to manipulate markets on the part of a corporate officer is considered a violation of the ’33 Act at least for civil purposes. It does not require a direct solicitation for the security itself. In any case, there appears to be an attempt to create market value based on materially false or ommitted information. And, yes, I suspect that this constitutes all sorts of consumer protection law violations on both the Federal and State levels. In my opinion.

The Obama administration has no plan no clue on economics. All they do is make up stuff as they go along trying to convince the public that they are making some positive progress. On propoganda they are experts, on everything else noobs.

It is a VERY odd story. It sounds a lit like the government traded debt, which is paid out of assets in a bankruptcy, for equity, which is lost. Doubling down on a GM recovery seems a rather odd strategy for the Treasury to take with OUR money.

At the same time, as a major investor and insider into the exchange, they distorted the reporting of the financial aspects of this. If this had been another investor it might have meant a SEC investigation for market manipulation.

Anyone have an email to GM or better yet to the CEO directly? I don’t really like the web based contact form on their web site.
I have a GMC HD, great truck, love it, but unfortunately can never buy GMC again. Pretty sad really, but can not support the lieing liars.

Sheesh – already established bankruptcy law would have “solved” almost all the problems these “too big to fail” companies had AND it wouldn’t have cost the taxpayers billions upon billions upon billions!

Of course, that would have meant that the Unions would have had to take their proper place instead of being guaranteed to get everything they wanted by, what can only be described as, the most corrupt government this nation has ever seen.

The lion’s share of GMAC’s financial problems can be laid at the feet of its mortgage operation, which cratered in 2007, thanks to the drop in subprime mortgages. That signaled another big ripple effect: the start of a retreat in the housing market, and ultimately the whole financial industry.

Has anyone seen any Ditech.com Mortgage Company commercials?

Anyone at all….?

I remember seeing at least 1 nearly every hour on most major news channels (FNC, CNN, MSNBC) starting in 2001….well here’s the fun factiod that relates the above quote

GMAC Mortgage, a major financial services company and one of America’s leading mortgage loan originator, acquired primarily all the assets of Ditech Funding Corporation in 1999. This marked the beginning of significant growth for ditech and enabled the company to invest further in its products, technology, and customer service – and set the stage back then for ditech’s emergence, and current status, as a leading mortgage loan originator.

The lion’s share of GMAC’s financial problems can be laid at the feet of its mortgage operation, which cratered in 2007, thanks to the drop in subprime mortgages. That signaled another big ripple effect: the start of a retreat in the housing market, and ultimately the whole financial industry.

Has anyone seen any Ditech.com Mortgage Company commercials?

Anyone at all….?

I remember seeing at least 1 nearly every hour on most major news channels (FNC, CNN, MSNBC) starting in 2001….well here’s the fun factiod that relates the above quote
Ditech.com IS OWNED BY GMAC!

GMAC Mortgage, a major financial services company and one of America’s leading mortgage loan originator, acquired primarily all the assets of Ditech Funding Corporation in 1999. This marked the beginning of significant growth for ditech and enabled the company to invest further in its products, technology, and customer service – and set the stage back then for ditech’s emergence, and current status, as a leading mortgage loan originator.

I am trying to recall my securities law on this topic; perhaps someone who has more recent exposure can provide better information, but I recall that when a CEO tries to manipulate public perception of the value of a company by false assertions or ommissions of fact, it constitutes a 10(b)(6) violation. If anyone bought GM stock based on these representations, and the stock loses value, someone will be held liable. As far as criminal liabilities go, can you say “Enron?” There does not seem to be an appreciable difference in management conduct. In my opinion.

ObjectionSustained on April 23, 2010 at 11:30 AM

–It’s 10(b)(5) and Rule 10b-5. Material false statements or material omissions are violations. But it looks like the amounts in the escrow account may not have been TARP loans, but instead were some other type of financing. I’m wondering if they weren’t GM funds required to be held in escrow as security for the TARP loans.

Didn’t expect a reply, but I emailed GM about the new ad saying they’ve repaid the loan and got this back as a reply:

Thank you for contacting General Motors. While we’re disappointed to hear that you feel this way, we understand and ask that you give us some time, and take another look at GM and our products in the future.

We are confident that we will emerge a leaner, stronger company, offering desirable, high-quality vehicles from the Chevy, Cadillac, Buick and GMC brands. The resulting General Motors will be more efficient. Smarter. Faster. More competitive. With a renewed commitment to cutting-edge automotive technologies, including improved fuel efficiency, quality and design.

I invite you to stay up-to-date on our promising new future by visiting GMreinvention.com.

As a GM retiree I welcome the news that they have repaid the money you and I loaned to them. Now I expect they will relieve all of us (I pay taxes just like you do) from paying retiree pensions with our tax money through the PBGC. I expect GM will now pick up the entire cost of GM retiree pensions. After all, their solvent now, aren’t they?

As a side note, last year my son was shopping for his first car. He test drove a number of GM vehicles. Finally, at my suggestion he purchased a wonderful pre-owned vehicle with good looks, good gas mileage and good get up and go. My next car may be an Altima as well.